Former Met Lenny Dykstra Files for Bankruptcy

Baseball legend Lenny Dykstra filed for Chapter 11 bankruptcy protection today, which puts a hold on the planned foreclosure auction tomorrow of his $25 million Ventura County mansion.

He bought the home from Wayne Gretzky for $17.5 million, a sprawling estate nicknamed "Wayne's World" by those who live behind the gates of Sherwood Country Club.

Dykstra's attorney, Walter Hackett, says the bankruptcy will give Dykstra time to "reorganize his estate, successfully challenge the multitude of meritless claims that have been made against him and allow him to pursue his lawful claims against a number of parties who have attempt to steal his property, breached material agreements with him, or otherwise acted in bad faith."

How did a high-flying investment advisor and entrepreneur end up in bankruptcy?

According to Hackett, Dykstra obtained a $12 million first mortgage from WaMu, and an $8 million second mortgage through a smaller lender in Los Angeles, totaling $20 million, more than the purchase price.

The second mortgage had a high interest rate, but Hackett claims Dykstra was told by the WaMu loan officer that both mortgages would be re-financed into one loan after 60 days. That never happened, says Hackett, forcing Dykstra to liquidate "a substantial amount of assets" to pay off the second mortgage.

Those assets consisted of an promissory note he had after selling his chain of car washes. Hackett says when Dykstra sold the business, he was guaranteed a six-figure monthly income for a decade, with a large lump sum at the end, an asset Hackett says was worth $40 million. But Dykstra had to liquidate that asset at a steep discount to pay off the $8 million.

However, it's not JPMorgan Chase which moved to foreclose on the mansion. Instead, Hackett says it was Index Investors, which had loaned the baseball legend $900,000, and Dykstra had put his home up as collateral. Hackett says Dykstra filed a lawsuit against Index Investors last week, and is now considering a lawsuit against JPMorgan Chase.

CNBC also spoke with Jeff Smith of Index Investors, who confirms that his company moved to foreclose on Dykstra's home because Dykstra owes him $910,000. Smith says he loaned Dykstra $250,000 last November to help him pay for the repair of an engine on his Gulfstream II jet, plus another $40,000 to help him pay attorneys fees.

Smith says Dykstra promised to repay him by January 15th, after selling the jet. However, a month later, in December, he claims Dykstra called back asking for another loan.

Smith tells CNBC, he loaned Dykstra another $300,000. "He never repaid a cent" of the $590,000, Smith says, which he claims has grown to $910,000 with interest and fees.

Smith says both sides were in court Wednesday, as Dykstra's camp calls the loan illegal, because it's a commercial loan based on a personal primary residence, which is against the law in California.

However, Smith says Dykstra signed papers claiming the mansion was not his primary residence, but an investment property. Dykstra, in fact, may be hoping to turn the mansion into a fractional ownership property, but Smith says that is not allowed under the CC&Rs at Sherwood.

Meantime, Dykstra remains the owner of the mansion, according to his attorney. "It is, and has been, his residence."